Viewpoint: Biodiesel output relies on HOBO as RINs fall

The US biodiesel industry is relying on stronger production margins to maintain output as the value of renewable credits hovers near three-year lows.

Biodiesel production levels reached 16.31mn bl in the first five months of 2018, according to data from the US Energy Information Administration (EIA), which is about 21pc higher than the same period in 2017. The increase in output comes after Argentina and Indonesia were slapped with antidumping duties by the US in August 2017.

Producers have mainly benefited from a wider heating oil/soybean oil (HOBO) spread, which has reached levels not seen since 2014. The HOBO spread hit a high of +7¢/USG on 26 July, up 52¢/USG from -45¢/USG at the beginning of 2018. Ultra-low sulfur diesel (ULSD) prices are at four-year highs as crude prices remain supported by Opec countries' reduced output. Soybean oil prices are at levels not seen since late 2015 amid the ongoing trade dispute between the US and China.

Yet the release of the US Environmental Protection Agency's (EPA) 2019 renewable volume obligations (RVO) did not account for small refinery hardship waivers granted to 29 refineries. The agency has estimated there is a total of 3.06bn carryover RINs, about 15pc of the total 2019 RVO and 840mn RINs more than what was anticipated when the 2018 RVO levels were set. The waivers have put intense pressure on the value of biomass-based diesel D4 RINs, which has curbed incentives for increasing biodiesel blending. Under the proposed 2019 RVO, blending obligations will increase 3.1pc to 19.88bn USG, but that has not been enough to limit losses on RIN values.

Following the EPA's proposal, the latest Short-Term Energy Outlook released by the EIA lowered the agency's forecasted biodiesel production for 2018 by 6,000 b/d to average 131,000 b/d. The forecast for 2019 output was lowered by 5,000 b/d to an estimated 144,000 b/d.

Blending economics could see a significant boost in profitability with the reinstatement of the blenders' tax credit (BTC). Industry trade groups have joined forces recently to concentrate lobbying efforts on congressional leaders for an extension to the BTC, which was retroactively established for 2017 but not 2018.